Five Maine economists forecast 2014's highs and lows

Every year, Mainebiz asks five prominent Maine economists to give us their predictions for the upcoming year. While the state economy's ride to recovery seems aided by training wheels, the road ahead appears more stable. Their overall outlook: Don't look away — things are turning up, just slightly.

Describe Maine's economy in 2014 in one word.

Colgan: Up

Johnson: Unbalanced

Moody: Uncertainty

Rector: Recovering

Reisman: Constrained

What's in store for Maine's economy in 2014?

Colgan: We should finally see steady growth for the first time since 2007. Last year was four quarters of employment growth and 2014 should be the same. But the pace will be very slow unless the national economy picks up more than expected. Recovery to pre-recession levels is still four years away.

Johnson: More unbalanced growth: Returns to capital, corporate profits and total personal income will continue to grow, but real median household income will continue to stagnate and wage and salary income for most workers will go nowhere.

Moody: Maine's economy is among the most heavily dependent on government spending in the country with only 65.8% of personal income generated by the private sector (11th smallest) in 2012. As a result, Maine's economy is heavily politicized and happenings in Augusta and Washington, D.C., will weigh heavily on the state's economy. For instance, if the Maine Legislature passes Medicaid expansion in 2014, this would further crowd out the private sector and reduce Maine's ability for sustained long-term growth. As long as we avoid any major political shocks to the system, 2014 should see continued, albeit slow, growth in jobs and income.

Rector: Maine's economy will continue to grow slowly in 2014, assuming there are no unpleasant surprises to derail the growth. The budget deal passed by Congress helps in a couple of respects, assuming an appropriations bill passes. It should help stabilize business and consumer confidence and provide some near-term relief from sequestration. If the U.S. economy experiences stronger growth as a result, Maine's economy will also see improvements.

Reisman: Slow uneven growth, a declining unemployment rate, more part-time jobs and carbon phobia. The desperate and lawless implementation of the Affordable Care Act will cast a pall over the entire economy, reducing confidence and productivity and further damaging the rule of law, as if crony capitalism hadn't done enough already. There will be a tsunami of independent money trying to influence the gubernatorial and legislative races. The Maine Conservation Voters PAC, funded by environmentalists, the Maine Education Association, and Portland Press Herald publisher and congressional spouse Donald Sussman spent $350,000 trying to defeat LePage in 2010. I expect that to more than double.

What are the chances — in a percentage — of another recession in 2014?

Colgan: 30%.

Johnson: 5%. Federal fiscal policy and state and local austerity remain huge drags on the economy, and congressional intransigence is the biggest threat to the recovery right now.

Moody: 30%. The Federal Reserve seems committed to its bond buying program, which purchases around $85 billion of bonds every month. This unorthodox program has, so far, kept interest rates low. As long as this is maintained, it appears that a national recession is not immediately on the horizon.

Rector: Maybe 5%? The national economy is gaining some pretty good traction, so it would take a significant event to send us into recession. The growth has come almost solely from the private sector, which is encouraging.

Reisman: 10%. The economy is being held back by state and federal policies that reduce confidence and increase uncertainty (The ACA, EPA carbon/climate change regulations, Keystone pipeline delays and barriers, Koch phobia, income redistribution schemes).

How will the continued rollout of the Affordable Care Act affect Maine?

Colgan: Eventually it will expand demand for health care services, but Maine already has a relatively low number of uninsured so the gains will not be quite as big as in some states. The decision on the MaineCare (Medicaid) expansion will be a key, and this is not likely to be resolved until 2015, if then.

Johnson: The impact on the economy as a whole will be small, unless we accept federal funds to cover 70,000 low-income Mainers who don't have health insurance or are about to lose it soon. That would add $350 million to the state's economy and more than 3,100 jobs over the next three years. The impact on the lives of Mainers struggling to pay for health care will be large, regardless of the effect on GDP or total job growth.

Moody: Rollout of the ACA has clearly seen a rough start, but the much publicized website woes are only the tip of the iceberg. The reason is simple: Not a single small group or individual plan prior to 2014 has met the ACA requirements, so all non-grandfathered plans are on the chopping block and the number of grandfathered plans will deteriorate quickly. This is true not just for individual plans but also for many employer-sponsored plans. In fact, this is also true for the vast majority of plans provided by small employers who employ fewer than 50 employees. Unfortunately, the result will be dramatically higher insurance premiums for Mainers in 2014.

Rector: There is still a tremendous amount of uncertainty around the effects of the Affordable Care Act, particularly given the rocky launch of healthcare.gov and the delays to different parts of the law. Small businesses are still concerned about how exactly the law will play out for them and some are holding off on hiring because of these concerns. If young, healthy individuals decide to pay the fines instead of participate in the health care exchanges, the cost of health insurance will be much higher than originally expected, putting a damper on consumer spending.

Reisman: How will we ration health care? Let me count the ways. MaineCare (Medicaid) expenditures will continue to grow and cannibalize the Maine budget. Below cost MaineCare and Medicare payments will result in a two-tier health care system, where lower income and senior Mainers have longer waits and fewer providers. Provider networks will be severely limited. Tens of thousands of Mainers will lose their employer-based coverage and be forced to move to the exchanges as employers cancel coverage and/or convert jobs to part time. “Affordable Care” will be recognized as yet another big lie from this administration.

What's your forecast for jobs in the state?

Colgan: Overall, I estimate job growth will be about the same in 2014 as in 2013 — up about 4,000 jobs.  

Johnson: We will add from 3,000 to 5,000 nonfarm payroll jobs in 2014.

Moody: I see the job outlook for 2014 will be one of slow and steady growth with the addition of about 4,000 jobs. However, analysis by the Maine Department of Labor suggests that the labor force has already peaked and will begin declining as the work force continues to age. While there is still plenty of slack in the work force to fuel employment growth in 2014, a declining work force moving forward will create a strong headwind for expanding payrolls beyond 2014.

Rector: Maine should see some employment growth in 2014, although it will remain below U.S. growth. We will probably pick up a few thousand jobs, but annual growth will be 1% or less. One of the biggest limiting factors is our demographics. Employment growth is driven in large part by population growth and Maine's population simply isn't growing.

Reisman: Maine will continue modest gains in employment, gaining another 4,000 jobs. Most of the gains will be in the 1st congressional district, although the Lewiston and Bangor areas will show some life. For the rest of the 2nd congressional district, it's the green road to serfdom.

For the housing market?

Colgan: Existing home sales will continue to improve and median house prices will increase. New housing construction will improve compared with 2013, but will remain well below pre-recession levels.

Johnson: Statewide, the median home price will grow 3% to 4%, which is faster than inflation but slow enough to keep the median price below the pre-recession level. Delinquencies and foreclosures will remain well above pre-recession levels and limit price growth. Sales growth will slow down to the 8%-to-12% range.

Moody: As I noted previously, the Federal Reserve is not likely to increase interest rates any time soon. Maine's housing market is already showing some renewed signs of life, especially in the southern portion of the state. Continued low interest rates should keep the housing market steady with modest growth in sales and prices in 2014. Yet, like the stock market, any change in policy from the Federal Reserve would be swiftly felt in the housing market. Maine is particularly vulnerable given our high rate of second home ownership, especially from away, which is much more volatile.

Rector: The housing market has been doing well lately, especially in the greater Portland area, but is likely going to slow a bit over the winter. When interest rates begin to rise again home sales will take a hit as second-home buyers and first-time homebuyers find mortgages less appealing. Foreclosures remain a concern as well — Maine's foreclosure rate remains high and the length of the foreclosure process poses problems for real estate markets.

Reisman: After an upturn in sales and new construction in 2013, increases in interest rates and continuing lackluster growth will stall the housing market.

For energy and heating costs?

Colgan: No big changes seen. World and U.S. supplies are adequate and barring a major disaster should remain so.  

Johnson: Oil and gasoline prices will be about the same as they were in 2013. Massive untapped energy efficiency savings will be realized sooner or later, but not in 2014.

Moody: The good news is that hydraulic fracturing, or “fracking,” looks to be a real game-changer in the energy market. The thought that America could be self-sufficient in terms of energy was laughable a decade ago, but could be achievable as fracking technology continues to mature. As a result, this new supply should help keep energy prices in check nationally. Unfortunately, Maine is still very reliant on heating oil so this energy boom will take some time to yield benefits. Also, turmoil in the Middle East should keep the cost of heating oil on the expensive side in 2014.

Rector: Natural gas prices have risen recently due to high demand and limited supply — this is likely to remain the situation through the next year. Heating oil costs remain high as well, which is bad news for the Mainers relying on oil to heat their homes. The high cost of energy in Maine is always a challenge for residents and businesses, limiting the funds available for other purchases, hiring and investments.

Reisman: Fracking will continue to provide cheap natural gas and prevent our U.S. senators from droning on about “peak oil.” Maine will commit to expanding offshore and land-based wind at more than $.20/kWh, four times the cost of alternatives. Environmental advocates will tout the hundreds of thousands of tons of carbon “pollution” averted, but never disclose how much global warming has been prevented (none) or at what cost. Efforts to repeal the law of supply by preventing Canadian development of oil sands will continue.

Where will Maine see the biggest gains?

Colgan: Major gains in employment will be in professional and business services and leisure and hospitality. Other sectors will grow modestly with continued declines in government employment, mostly at the local level. Health care and retail will grow well below pre-recession growth rates.

Johnson: Health care, finance, communications, business and professional services. In all of these areas, Maine will see continuing gains for the owners of companies and capital and for workers at the top of the wage and salary distribution.

Moody: The biggest driver for income and job growth in Maine has been the health care sector and that won't change for 2014. In particular, Gov. LePage's successful effort to pay off the state's hospital debt will be a much-needed shot in the arm to the industry, injecting up to $500 million in state and federal funds. The delayed health care investments and employment opportunities due to this debt should now be able to move forward in 2014 as that money is received.

Rector: Improved consumer confidence should continue to fuel growth in home sales, tourism, the leisure and hospitality industries and retail sales, including auto sales. The Portland-to-Europe container service that opened earlier this year should continue to provide new export markets. Continued redevelopment of the former Naval Air Station in Brunswick will help boost economic growth in the midcoast region.

Reisman: In employment and income, the professional and business services (for example accounting), trade, transportation and utility sectors will show the largest absolute and relative gains. If energy prices are not driven up by apocalyptic carbon phobia, manufacturing could have some modest gains. Geographically, southwestern Maine, essentially the 1st congressional district and close environs will see absolute and relative population and economic gains.

What will be Maine's biggest challenges?

Colgan: National economic growth. Beyond that, Maine is entering a big demographic transition with increasing shares of retired workers and declining numbers of new workers entering the work force.

Johnson: Maine's biggest challenges are ensuring that the fruits of Maine's labor accrue to low- and middle-income working families — the vast majority of Mainers — and making health care and higher education affordable.

Moody: Maine's retail industry will really struggle with the hike in sales tax (to 5.5% from 5%) and hike in the meals and lodging tax (to 8% from 7%). Some of the growth in retail sales in 2013 was likely driven by consumers pushing up spending ahead of the rising taxes. In 2014, there will be greater cross-border shopping activity in New Hampshire, where I've estimated that Maine already loses up to $2 billion in retail sales. Someone will be taking this tax hit, whether it is the owners or workers. The customers have other options.

Rector: Maine's demographics continue to pose a huge challenge for the state's economic growth. The combination of little-to-no population growth and the aging of the existing population means job growth will be minimal. Maine needs to connect the dots between quality education and work force development, and industry needs to address the near-term challenges while attracting new workers and businesses to ensure long-term economic success.

Reisman: Carbon phobia is driving Maine toward expensive energy, green moral posturing, crony capitalism, class warfare and violating the separation of church and state. Maine's biggest challenge is to recognize the environmental left as the deluded threat to freedom and prosperity they are. After that, our aging population, lack of young adults and continued hollowing out of rural Maine are our major challenges. The closing of the shrimp harvest in the Gulf of Maine is a potential major concern, as it may be the harbinger of broader ecological and food chain problems.

What is your one piece of advice to business owners in 2014?

Colgan: Hang in there. We may finally be looking at some sustained growth.

Johnson: Tell your congressional and State House representatives to level the playing field for Main Street businesses. Large multinational corporations aren't out-competing you, they are out-spending and out-lobbying you to make laws and rules that hurt you and help them.

Moody: There is a lot of uncertainty out there, especially with taxes and the ACA, which will make planning for new investments or hiring very difficult. How will businesses be able to hire a new worker when they don't know how much that worker will cost them? At the state level, the ACA's Medicaid expansion, if enacted, would put upward pressure on the budget and potentially lead to even higher taxes. The prudent course of action is to stay liquid and be prepared to act when this uncertainty lifts — which may not happen until after the election.

Rector: Take the time to look at the demographics of your work force and think about what sort of a plan you might need to have in place to address future work force availability. Consider the needs of your business and whether you might have a large number of workers retiring at the same time. Do you have enough workers to step into higher-level positions? Will you lose valuable institutional knowledge that should be passed on? Are there ways you could partner with educational institutions to help build your potential work force?

Reisman: Economic freedom is necessary to growth and prosperity. Crony capitalism, increasing state power, violation of the rule of law and debt/GDP ratios approaching one are the antithesis of economic freedom. Keep that in mind when you support or oppose politicians and interest groups.

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